BUSINESS BY CARLSON! 9-20-17

Content provided by Paul Vaaler of the Carlson School

The last week of Summer, at least according to the calendar. That said, some companies in and around the Twin Cities are getting a jump on Fall and the flurry of business activity this season typically brings.

One example is yesterday’s announcement by St. Louis-based Post Holdings that it was acquiring Ohio-based Bob Evans Farms for $1.53 billion. Here is where you can learn more about the proposed acquisition: http://www.startribune.com/post-holdings-buying-bob-evans-farms-in-1-53b-deal/445678993/. Post Holdings is well-known for its cereal products, one of which is Malt-O-Meal manufactured in Northfield, Minnesota. Bob Evans Farms (BEF) makes refrigerated food (e.g., frozen sausage) in easy-to-prepare containers. More health-conscious consumers are shying away from such products in favor of fresh, natural and organic foods. So BEF is in a so-called “declining” industry, a description that sometimes dogs another Minnesota food manufacturer, General Mills. But there is money to be made in declining industries if firms can cut product costs faster than decreases in product demand. And that’s what Post intends to do, at least according to this presentation to analysts: https://www.postholdings.com/wp-content/uploads/2017/09/Post-to-Acquire-Bob-Evans-Farms-presentation-9.19.17-FINAL.pdf. Here’s what I don’t understand about the proposed deal. It was announced on Tuesday but the stock price of BEF rose only 5.6%, from about $73 to $77 per share. Typically, the target firm’s stock price increases much more –perhaps 30-40% above the pre-acquisition stock price: http://merger.com/ma-question-dont/. This jump in price is a “control premium” paid by the acquirer. So why is BEF going so cheaply? I am not sure. If the market saw this acquisition coming well in advance, then traders bid up the price including the anticipated control premium to be paid by the acquirer. That doesn’t seem to be the case here. The big owners of BEF are institutions like Vanguard and State Street, not arbs. BEF is not growing in sales, but it isn’t in any financial trouble either. BEF has lots of cash on hand and little long-term debt. So why is Post getting away with an acquisition involving little or no control premium? I suspect that BEF shareholders are asking the same question, and likely preparing to sue their management and board for letting the company be acquired for too little. If the law suit hasn’t already been filed in Ohio or Delaware (where BEF is incorporated).

Guess who one of the other big institutional shareholders of BEF is? The Norwegian government! That’s right: Norges Bank, the manager of Norway’s $1 trillion sovereign wealth fund owns about $19 million in BEF stock: http://www.nasdaq.com/symbol/bobe/institutional-holdings. That’s right: Norway’s sovereign wealth fund just passed the $1 trillion mark: https://www.cnbc.com/2017/09/19/1-trillion-mark-reached-for-worlds-largest-sovereign-wealth-fund.html. It’s an incredible pool of invested capital and it’s run for a country not a company. Does that matter? For some free-market ideologues, the idea of state ownership in a company gives rise to Ronald Reagan’s nine most terrifying words: I’m from the government and I’m here to help. The Norwegians see it differently. Since the early 1990s, successive governments have been using the fund to re-invest North Sea oil revenues for the day when the oil runs out. So everyone of Norway’s 5.3 million citizens have an undivided interest of about $189, 000. My colleague at the Carlson School, Gurneeta Vasudeva Singh, has studied the Norwegian Sovereign Wealth Fund’s strategy of financially lucrative and also “responsible” investment that nudges firms to avoid practices that are detrimental to public health (e.g., cigarette manufacturing) or the environment (e.g., toxic chemical spills). She finds that the Norwegian sovereign wealth fund is pretty good at nudging firms to be more responsible as well as profitable. Here is where you can learn more about Gurneeta’s research: https://www.youtube.com/watch?v=KuSaEjydj18 and http://pubsonline.informs.org/doi/abs/10.1287/orsc.2013.0822. It brings new meaning to the old patriotic call of Alt for Norge!

It’s a tough week for Toys R Us, or maybe we should say Toys R’nt Us After decades as the go-to spot for birthday and holiday gifts, Toys ‘R’ Us filed for chapter 11 bankruptcy protection late Monday night, undone by debt and the rapid shift to online shopping. Here is where you can learn more about this development: https://www.bloomberg.com/news/articles/2017-09-19/toys-r-us-caught-in-game-of-chicken-that-turned-into-dominoes. Toys ‘R’ Us plans to close some under-performing stores and reconfigure those that remain to be more experienced-based, incorporating amenities such as play areas. The company expects most stores to be open for the holidays, and will use $3 billion in bankruptcy financing to continue buying merchandise and funding operations. Shares of toy makers Mattel and Hasbro—among the retailer’s biggest unsecured creditors, owed more than $135 million and $59 million, respectively—fell Monday after we reported last week that Toys ‘R’ Us was preparing to seek bankruptcy protection. Don’t take this as another indicator of the demise of bricks-and-mortar versus clicks-and-order retailers. Richfield-based Best Buy is bullish on near-term sales and income growth: http://www.startribune.com/best-buy-sees-solid-growth-ahead-in-2021/445718223/. Best Buy CEO Hubert Joly has turned around the consumer electronics retailer with stores and people that can help consumers in ways that an online retailer like Amazon can’t. Great-looking stores with well-trained staff are destinations for consumers looking to solve a problem or learn about new products and services. Joly has done that. Brian Cornell is trying to do that at Target. Maybe Toys R Us can do that after re-organization.

Enjoy the final days of Summer 2017. It’s been beautiful and ending beautifully.

IN CASE YOU MISSED IT, Click Here to listen.

More from The WCCO Morning News With Dave Lee
Comments

Leave a Reply

Please log in using one of these methods to post your comment:

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

More From WCCO | CBS Minnesota

Good Question
Best Of Minnesota
Excellent Educator

Watch & Listen LIVE